Cryptocurrency Venues: Segmentation, Fees, and Tax Policies
56 Pages Posted: 1 Jun 2022
Date Written: May 2022
We study interactions between cryptocurrency trading venues, traders, and taxation in which the venues differ in technology (fast vs. slow). The property distinguishing this market from other markets like equities is the fact that each venue clears trades separately from one another. We show that trading fees rise when the venues are technologically differentiated. Improvements in the slow venue’s technology is associated with greater trading volumes, whereas improvements in the fast venue’s speed has an ambiguous impact. When the two venues have similar technologies, differentiation has a positive effect on trading volumes. Our welfare analysis suggests that in equilibrium, the tax rate to optimize tax revenue depends only on trader preferences, and it is thus independent of the venue properties and competition. When the government assigns different weights to its revenue, trader welfare, and venue welfare, the aggregate welfare can have a maximum for nontrivial tax rates.
Keywords: Digital economy. Crypto market. Fragmentation.
JEL Classification: C7, D86, G2, L13, L86.
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